Could Microsoft be the next Dell?

Commentary: The math could support a leveraged buyout of Mr. Softy

Could Bill Gates and Steve Ballmer follow Michael Dell’s lead? Could Microsoft get taken private?

Reuters

Microsoft CEO Steve Ballmer speaks at the launch event of Windows 8 in New York, October 25, 2012.

It sounds far-fetched, and maybe it is. After all, Microsoft
MSFT, -0.38%
is one of the world’s largest companies, with a market value of $230 billion.

But in this environment, thanks to the madness of Wall Street and the low-interest climate created by “Helicopter Ben” Bernanke, anything is possible. The numbers, remarkably, may work. (If you’re in private equity and you’re reading this, remember: I get 1% of any deal).

In case you missed it, Dell
US:DELL
this week announced it is being taken private in a $24 billion deal, one of the biggest ever struck on the stock market. And when I was calling around to my sources this week, asking about who might follow Dell, Mr. Softy was the surprise name that came up.

The Dell takeover isn’t just about the company’s collapsing stock price, which makes the takeover so cheap. It’s about the bond bubble, which makes the deal easy.

Driven by the Federal Reserve and the public’s insatiable mania for bonds, the interest rates on corporate debt have collapsed. For instance, the average interest rate on BBB-rated bonds -- the riskiest bonds that can still claim to be “investment grade” – has plunged to just 3.4%.

To put this in context, the central indicator in the bond market predicts inflation over the next ten years will be 2.6%. So people buying BBB-rated bonds are lending money to relatively risky companies in the hope of earning just 0.8% above inflation—before tax.

From the point of view of people like Michael Dell and the private equity honchos helping take his company private, this makes the logic of the deal pretty simple. When someone offers you free money, take it.

And if bankers can leverage up a takeover with money borrowed at 3.4%, or anything close, there are a lot of deals that suddenly look viable. Remember, as ever, that if the deal goes sour down the road it’s the bond investors, not the private equity boys, who lose out.

Let’s run the numbers on Microsoft.

If someone — let’s say Ballmer — wanted to take Microsoft private, he’d have to raise the money to buy up all the shares. To persuade stockholders to sell he’d have to offer them more than the current market price — probably, based on standard Wall Street price, about 30% more.

Dell goes private

(17:03)

Paul Vigna and David Benoit discuss a deal to take computer maker Dell private. Photo: AP.

According to Microsoft’s public filings, the company has 8.4 billion shares outstanding. At the current market price, $27.44, they value the entire company at $230 billion. If a buyer had to offer 30% more, that would be about $36 per share — a total cost of around $300 billion.

Where would the dealmakers get the money? And what would the deal look like?

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.